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The Singapore High Court has rejected Three Arrows Capital’s (3AC) motion to dismiss a lawsuit filed by Arthur Cheong, founder of the web3 investment firm DeFiance Capital.
The latest decision marks a pivotal moment in the ongoing legal battle between the two entities, shedding light on the complexities of asset ownership and trust in the crypto space.
Origins of the DeFiance vs. 3AC dispute
Arthur Cheong’s lawsuit, initiated in April 2023, centers on the assertion that investors of DeFiance Capital are the rightful beneficial owners of assets held in trust by 3AC. Cheong’s argument challenges the use of these funds by the 3AC estate to settle creditor claims following the hedge fund’s bankruptcy.
The dispute traces back to an agreement between Cheong and 3AC founders Su Zhu and Kyle Davies to establish DeFiance Capital as an independent fund within the 3AC Group platform. The arrangement granted DeFiance Capital access to 3AC’s resources, including its infrastructure and service providers, while maintaining segregated accounts and wallets under Cheong’s name.
Despite the collaborative beginnings, tensions arose when 3AC relocated its headquarters to Dubai in 2022, leading to the incorporation of DeFiance Capital as two separate entities in Singapore. A crucial point of contention is the alleged failure to transfer certain assets to DeFiance Capital as per the initial agreement, the value of which remains unspecified in the court’s decision.
The legal proceedings took a significant turn in November 2023, when the Singapore High Court permitted DeFiance Capital to proceed with its lawsuit against 3AC’s estate following its bankruptcy in July 2022, aiming to reclaim assets still under 3AC’s control. The decision was bolstered by the court’s recognition of a trust over the crypto assets in question, despite 3AC’s counterclaims dismissing the lawsuit’s merit.
The court further highlighted Singapore’s jurisdiction as the appropriate forum for the case, given the location of the individual controlling the disputed wallet keys and the legal nexus established under Singaporean law.
The recognition of the trust by the judge, while not fully resolving DeFiance’s situation, is viewed as an encouraging indication for the firm, as noted by a former restructuring attorney by the online name of WassieLawyer. He mentioned that this acknowledgment provides “much-needed vindication” for Cheong.
Fallout of 3AC’s investment strategy
Three Arrows Capital (3AC), once among the world’s leading crypto hedge funds, faced a downturn due to its investments in Terra, staked Ethereum, and Grayscale’s Bitcoin Trust, according to its founders, Su Zhu and Kyle Davies, in a Bloomberg interview. The firm’s decision to liquidate its holdings across the cryptocurrency sector led to its bankruptcy filing on June 30, 2022.
DeFiance, established in 2020, is an investment firm focusing on decentralized finance and GameFi. It supports projects such as dYdX, Aave, and Lido, per its website.
Following the liquidators’ takeover of 3AC’s assets in 2022, allegations surfaced that 3AC and DeFiance Capital operated as a single entity, supported by legal documentation.
On Jan. 31, WassieLawyer shared via Twitter that DeFiance was merely utilizing 3AC’s legal framework for a fee without merging their operational activities. This distinction in legal wording is crucial for 3AC creditors seeking to access DeFiance Capital’s funds.
1/ A decision relating to @DeFianceCapital's lawsuit against 3AC in Singapore has just been made public and contains some interesting points around the treatment of cryptoassets and trust relationships.
For context, I have been working with @Arthur_0x on this for the past year.
Wassie highlighted the ongoing debate in the 3AC case between substance and form, a distinction Judge Ming indicated would likely benefit the arguments focusing on DeFiance’s actual operations.
In December 2023, crypto.news reported on the interrogation of 3AC co-founder Su Zhu by Teneo’s lawyers, the liquidators tasked with investigating the fund’s collapse and locating its cryptocurrency assets. The event occurred after Zhu’s arrest on Sep. 29 at Singapore’s Changi Airport, as he was attempting to leave the country, as per reports.
Zhu’s arrest and subsequent four-month detention were due to his lack of cooperation with the liquidation process of 3AC. He was released in December 2023. Meanwhile, efforts to locate Kyle Davies, another co-founder of 3AC, have so far been unsuccessful.
